Financial crime risk technology – Don’t get left behind

How good is good enough? It’s a question compliance professionals may often ask themselves when it comes to managing financial crime risks. The principle-based approach to financial crime regulation around the globe means compliance is rarely measured against a prescriptive set of standards. It also means regulators can continue to raise their expectations through issuance of updated guidance. For example, In June 2021, the FCA published a Dear CEO letter¹ specially targeting Retail banks on several common weaknesses and In April 2021 the HKMA published their thematic review² on use of external data, highlighting four key areas of focus.

This approach is understandable given the constantly evolving financial crime threat. We have seen the volume of fraud cases growing year on year and reach record highs in 2020³, whilst AML intervention continues to disrupt as little as 0.1% of illicit funds⁴.

Keeping on top of updated guidance and managing this evolving risk has become an increasingly expensive endeavour with the true cost of financial crime compliance estimated to be over $200 billion⁵ in 2020. With this in mind, financial services firms are increasingly looking to technology and analytics to improve risk identification, cost efficiency and customer experience. It is important for firms to understand the evolving industry standards in order to avoid being left behind. The below diagram summarises how the industry is looking to leverage technology and analytics for financial crime risk management:

Every organisation will be at different points in this journey, and it is by no means necessary for every firm to achieve each stage. The extent to which this path is followed will depend on their client portfolio, services offered and scale.

A case study example

A medium sized financial services firm operating in one country may want to pursue stepping stone 2 to realise efficiency benefits which can be reprioritised and explore opportunities for the ‘final leap’ where they may benefit further from shared controls in the future. This would be a better strategy than pursuing machine learning solutions (i.e. stepping stones 3 and 4) where the volume of good quality data may not be sufficient to drive the desired outcomes.

As financial crime professionals, the question which often needs to be answered is what do effective systems and controls actually mean? Or what does success look like? The answer to these questions will continue to evolve. One thing is clear, every organisation needs to have a firm understanding of the maturity of their controls against their peers, and what their strategy is moving forward. By doing so, they will be able to limit the risk of over-focusing on technical compliance and being left behind by the evolving industry standard.

 

1 https://www.fca.org.uk/publication/correspondence/dear-ceo-letter-common-control-failings-identified-in-anti-money-laundering-frameworks.pdf

2 https://www.hkma.gov.hk/media/eng/doc/key-information/guidelines-and-circular/2021/20210426e1a1.pdf

3 https://www.ukfinance.org.uk/system/files/Fraud%20The%20Facts%202021-%20FINAL.pdf

4 Ronald F Pol, February 2020, Anti Money Laundering: The worlds least effective policy experiment? Together, we can fix it.

5 https://risk.lexisnexis.com/global/en/insights-resources/research/true-cost-of-financial-crime-compliance-study-global-report#:~:text=According%20to%20our%20Global%20True,%24180.9%20billion%20the%20previous%20year